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London insurance market tests resilience against the next ‘big one’

31st January 2017

How would the world’s pre-eminent insurance market respond in a worst-case scenario catastrophe? A White Paper published today provides compelling insights, following a unique industry-led ‘dry run’ simulation of a never before seen US$200bn catastrophic loss event.

London, 31st January 2017 – A consortium of leading London insurance market organisations and associated entities (‘the industry steering group’) have today published a White Paper testing the resilience of the world’s pre-eminent insurance market to a major loss event.

Led by Hiscox and facilitated by McKinsey & Company, the exercise tested two very different fictional loss events happening in quick succession. The events chosen reflect the changing nature of risk; a highly destructive hurricane, an unprecedented cyber event, one of the largest stock market declines, and a major re-insurer default with consequent delays in reinsurance payments. These simulated events resulted in extraordinary global insurance losses of approximately US$200 billion. This amount would be the largest loss ever seen; more than twice the size of losses caused by Hurricane Katrina and at least four times larger than the World Trade Center insured loss. The industry steering group found that:

Within the confines of the exercise, participants considered that they would have access to sufficient practical and financial resources to cope with the losses that would result from such an event, and would be able to serve clients and pay claims fairly at the same time as ensuring continuity of cover to further enhance its pre-eminent global position.

This conclusion relies on the robustness of firms’ reinsurance and recapitalisation arrangements, and the ability of firms to implement these arrangements during a turbulent financial environment. There were no significant liquidity challenges highlighted in the exercise, though it was acknowledged that the simplified nature of the exercise means liquidity could be stressed to a greater or lesser extent in a real-world event.

Having examined five key areas which are traditionally considered important when responding to a market-turning event (capital, rates, liquidity, underwriting expertise and regulatory response), participants believed it was the deep underwriting expertise and a surefooted regulatory response that will differentiate the London insurance market in, and after, a major loss event. It was acknowledged, however, that robust capitalisation remains a vital pre-requisite.

The White Paper also sets out a series of recommendations for best-in-class practices to further enhance the London Market’s position as a centre of excellence. The recommendations cover three broad areas:

Ensuring customers are well served by putting in place internal processes to respond effectively to market-turning events;

Maintaining the London Market’s leading position and expertise in the global marketplace by strengthening Lloyd’s position and proactive stakeholder interactions; and

Collaborating with the PRA to clarify mutual expectations and ensure an effective post-catastrophe response.

These are outlined in detail in London Market looks ahead: Preparing for the next big insurance event, available here.

Robert Childs, Chairman of Hiscox Group said: “We have not had a market-turning event since 9/11 and it is important we understand how one might play out in today’s trading environment. Exercises such as these are often imposed by a regulator, but our industry-led approach is what makes the London Market so special. As a market, we have tested our robustness and resilience and stand ready to support our clients, trade forward, and ensure financial and economic stability during turbulent times. I would like to thank my colleagues from across the sector for their hard work and support in this project, including insurers, brokers, Lloyd’s, rating agencies, regulators and Her Majesty’s Treasury.”

Karl Hennessy, President, Aon Broking, who led one of the project’s two working groups, added: “This dry run is a demonstration of the London Market’s unique value proposition; namely the ability to bring together specialist underwriters, brokers, claims and other professionals to serve our clients at the time of their greatest need and beyond. In an increasingly competitive global (re)insurance market, such exercises, alongside the Market modernisation work (London Market Target Operating Model), are essential for London to continue to maintain and evolve its position as the pre-eminent centre of insurance expertise serving clients from across the globe.”

Commenting on the White Paper, the Economic Secretary to the Treasury, Simon Kirby MP said: “As the global hub for insurance and reinsurance, the London Market plays an important role in supporting economic activity in the UK and across the world. Thanks to the efforts of government, regulators and industry, the UK’s financial system is fundamentally strong and pro-active industry-led exercises like this one enhance our ability to identify and manage the risks of the future.”

Ends

Contact:

Lucy Hensher

Hiscox Group

+44 (0)20 7448 6619 / +44 (0)7824 996 370

Tom Burns/Simone Selzer

Brunswick Group

+44 (0)20 7404 5959

Notes to editors

The ‘dry run’ project involved 28 London insurance market organisations and associated entities, and was led by Robert Childs, Hiscox Chairman. It was organised by an industry steering group comprised of insurers and brokers from across the market, as well as Lloyd’s. A number of other organisations, including A.M. Best, Standard & Poor’s Global Ratings, the Financial Conduct Authority, the Prudential Regulation Authority and Her Majesty’s Treasury acted as observers. The White Paper represents the views of the industry steering group and does not necessarily represent the views of the exercise observers unless explicitly stated. Work on the project began in July 2016 and the simulation was carried out over a two week period in November 2016.

The industry steering group’s objective in holding the dry run was to test just how prepared the London insurance market is today to support its clients and pay claims through a market-turning event. It also sought to identify how the London Market might improve its own resilience and preparedness, at the same time as further strengthening its leading position and expertise in the global marketplace.

In setting out to achieve these objectives, two working groups were established to look in tandem at both the quantitative and the qualitative aspects of the Market’s response. The quantitative working group was led by Hiscox and the qualitative, customer-focused working group was led by Aon.

As a result of the exercise, three broad recommendations have been set out by the industry steering group for the London Market to further build upon its current capabilities. These are: to ensure customers are well served by further improving and stress testing its internal processes now to respond more effectively to future market-turning events; to enhance the London Market’s leading position and expertise in the global marketplace; and to collaborate with the PRA to clarify mutual expectations and ensure an effective post-catastrophe response.